Short-term jitters in Asia

Hiatus on the way to Asian century

by David Marsh

Mon 15 Jul 2013

The 21st century will belong to Asia, according to a lot of persuasive people including Meghnad Desai, chairman of the OMFIF Advisory Board, and Kishore Mahbubani, dean of Lee Kwan Yew School of Public Policy at the National University of Singapore, in a well-received new book.* Almost certainly they're right. Yet we still have more than five-sixths of the century to go. In the meantime, Asian countries are undergoing a spell of jitters as a result of latest signs of a Chinese slowdown, doubts about the true strength of the US recovery and persistent malaise in Europe.

Policy-makers, economists and financial market participants from Asia are less optimistic about the near-term outlook than many outsiders might expect (or hope). Despite efforts to promote more intra-regional trade and step up financial market integration within the main Asian countries, Asia is heavily dependent on the rest of the world for growth, particularly in view of its embedment in complex and sometimes volatile international supply chains. So Asia has a long way to go before it can be a self-contained force for economic expansion.

The high-level view from South East Asia is that the US is at a more uncertain stage in economic recovery than popularly believed. The Federal Reserve may remain trapped for some time in the unhealthy position of presiding over an excessive degree of monetary accommodation. Questions persist whether the Fed really will be able to cut back on liquidity injections through quantitative easing as and when US unemployment falls.

China’s economic growth slowed to 7.5% in the second quarter compared to a year earlier, according to official figures on Monday, matching expectations of a fall from the first quarter’s 7.7% advance, and in line with the government’s official growth target for the year.

The worry is not so much lagging Chinese growth this year, which Beijing seems to have under control, but a sharp slowdown in 2014 and thereafter, perhaps to substantially below the 6% level, previously regarded as an acceptable floor. This partly reflects the authorities’ wish to curb excessive debts of regional and local governments and to rebalance the economy with a big increase in private consumption, which will automatically shift growth away from the traditional generators of expansion, exports and investment.

Other dampening effects for Asia are likely to stem from a new era of cheaper energy in the US based on the shale gas revolution, which could affect the commodity and raw material cycle that has been favourable to countries such as Malaysia in recent years. A nagging concern is the slow pace of integration of Asian financial markets, which makes the region still unjustifiably dependent on financing conditions in western markets, and particularly the dollar, in spite of widespread efforts to boost use of Asian currencies in trade and investment.

Prof. Mahbubani of Singapore cites dependence on the dollar as one factor holding back Asia’s progress towards greater economic self-sufficiency. Sluggish institutional reform in governance of bodies such as the International Monetary Fund and the World Bank is preventing Asia from playing a role on the world stage commensurate with underlying shifts in economic performance, he says.

A further contradiction, Mahbubani says, is between the rising market integration of the Asian economies and the slow institutional integration of Asian countries.

The Asian economy meanwhile is sending out mixed signals. These seem to indicate fluctuating month-to-month fortunes rather than underlying strength. Singapore’s economy grew in the second quarter by a much-larger-than-expected 3.7% over the same period last year. This was much higher than the 0.2% growth in the first quarter, although it was driven mainly by a rebound in services and manufacturing that economists say is unlikely to carry through to the second half of the year.

On a more sobering note, Indonesia has had to raise its key interest rate by more than expected to 6.5% from 6%, contrasting with most expectations of a 0.25 percentage point rise, in the face of capital outflows and a weakening rupiah caused partly by anticipation of tighter US credit. Like other large emerging market economies such as Brazil and Turkey, Indonesia has been hard-hit by the financial market’s shift in favour in the last few weeks away from emerging markets towards core investment havens. All this is probably no more than a hiatus in Asia’s long-term growth trail, but there may be a few wobbles before Asia gets back on track.

*Mahbubani, K. (2013), The Great Convergence: Asia, the West, and the Logic of One World, PublicAffairs, New York.